My husband and I are in the process of buying our first home, we had an accepted offer on a short sale about a month and a half ago and are waiting for bank approval. My husband wants this home to be a starter home and while I am open to the idea of it being a starter home I wonder if buying a starter home with a 30 year mortgage makes financial sense in this economy, assuming the following factors-

1. Starter home= 5 years – 10 years

2. Closing costs are approx. 20K

3. Mortgage will be close to what we are paying in rent each month, not including homeowner’s insurance, utilities, repairs, etc. JUST principle and interest.

So based on the above factors, here are the reasons I am against it:

1. If we were to distribute closing costs of 20K over the length of our home ownership, we could tack on an extra 4K a year, approx $333 additional a month, and approx $165/month assuming a 10 year ownership.

2. The majority of your monthly payment in the beginning years of owning a home are interest payments, very little actually eats into the principle, hence leaving us with very little equity, which is our purpose for buying a home in the first place.

3. Interest rates are at a low point right now hence it has become more of a seller’s market in my area, more buyers are looking to buy to lock in a lower interest rate and homes are selling at decent market values. In 10 years from now the interest rates will likely be higher (obviously an assumption), hence the mkt value of homes could decline (depending on this single factor alone).

4. 5-10 years of home ownership will require hefty maintenance and based on the depreciable life of certain assets will more than likely include the following fixes – roof replacement (10K), boiler replacement (6K?), etc.

5. Most importantly (I forgot this originally) is the cost to sell a home. Seller pays all commission fees to the agents (generally around 4-6% of the selling price of the home), PLUS lawyer fees, and possible closing costs of the buyer.

Although my husband and I are “okay” financially, we are savers and always want to have an extra cushion to fall back on in case of emergencies, etc., so while this home is well within our means, I wonder if we should either consider this our forever home, wait until we find that home that could be a forever home OR jump into it with the mindset that it is a starter home and whatever losses we will take, we will worry about later on (although I am a planner, and not a fan of this idea!)…

I wouldn’t buy under those conditions. You can try to get the sellers to cover some of the closing costs, but 20K + a down payment does not seem worth it for a starter home. I also wouldn’t buy a starter home where the mortage is more than renting. Our mortage is $400 cheaper a month including taxes and insurance than it would be to rent a place half the size. I would take your time and either find a starter home comparable to the price or renting or wait awhile until you can buy a forever home.

Also, a 30yr mortage is pretty darn long. When I took Dave Ramsey’s Financial Peace class, he talked about getting locked into a 30yr mortage, but paying it off in 15 years instead by consistantly paying extra every month & writing on the check “additional $x amount to be paid on principle”

I would include homeowner’s insurance and property taxes in your mortgage calculation. A lot of people find they can afford their house payments then get a nasty surprise when they come to property taxes.

Make sure there are no nasty surprises like mold, faulty plumbing, etc. Major repairs such as those can be urgent and you don’t want to pay them within your first years of ownership when you’ve incurred a lot of expenses.

Pay attention to the area – is the area up and coming, improving, declining? If the area’s improving, your home’s going to appreciate in value, sometimes significantly. If it’s a not-so-good area, you don’t want to pay for an overvalued property.

@MrsN14: you actually reminded me to add selling costs to my original posting…the idea of covering closing costs goes both ways..it would work in our favor initially but could also work against us when we go to sell (assuming the buyer asks for the same contingencies)

My husband and I bought our “starter home” this year, but our mortgage payment + Home Insurance + property taxes is still $250 less each month than what we were paying to rent. We got a 15 year loan on it as well. I don’t feel bad about only staying in this house for 5-10 years because we got such a good deal on it.

In your case though, it really doesn’t sound wise to buy. Especially if you aren’t going to want to stay in it for very long. Just my 2 cents. Good luck!

@MrsSaltWaterTaffy: I do love the house, it just needs WORK, ALOT of work…I should have mentioned this, we are buying it for more than a 25% discount by comparison to neighboring homes (it was a multiple offer situation, so I know it is a good deal) …I am hoping that if we fix it up my husband could see the potential in it but forever not just for now! I guess we still have some time.

@abirdword: I’m definitely including property taxes in the calculation, I believe HO insurance would be under $100/month, I know utilities will put us over what we are paying in rent + we are moving out of the city and will have greater transportation costs. I do think the area is up and coming, but not in the sense that it is a bad area now, in the sense that there is new construction of a nice residential development a few blocks away . I did make sure it has a good school district just in case we plan on staying there longer than my husband anticipates. We are just starting out in our careers so I think he has the mindset that he will be making much more in time (which is a possibility given his field, but you can never rely on that).

@MrsSkeletonKey: That’s a good point, we could pay off more of the principle…as it stands right now the house is in awful condition and really needs work (which we have money set aside for), so I guess depending on how cost efficient we are with our remodeling would determine how much money we would make from it.

I think the main things to consider would be buying a home that has all the basics — good location and schools — that you could “grow into” over the years by expanding later on if need be. And get a 15-year mortgage so you can pay it off while you’re still young.

Well I can only tell you the story about my first house (also a Starter Home)

We bought in the mid 1980s, when Interest Rates were high, much higher than they are now… and the job market was so-so (there was also a Recession)

We bought our house and with all our expenses combined, were indeed paying more than our previous rent.

Now we were fortunate in that the house was aprox 5 years old, and so large amounts of maintenance were not required… we did the usual stuff tho… like paint, decorate (ie change out light fixtures), steam clean the carpets annually, maintain the grounds etc

5 Years later we sold our Starter Home with a HUGE Gain, as the market had improved, and were able to move into our Forever Home with a nice downpayment

(Our Forever Home by the way, would have been entirely paid off in about 15 Years from the time of purchase. So 20 Years of “Mortgages” vs 25, 30 etc. as we initially planned. This is of course because we were able to make higher payments over time, as we got more established in our careers, made more money, etc)

Anyhow, what I am saying here is you need more info about long term projections for the housing market in your area…

AND that historically houses continue to climb in value even in spite of what looks like a poor economy…

So what of these two houses ?

Well our Starter Home that we bought in the mid 1980s at just over $ 80 K (and sold 5 years later for $ 120 K) today sells for around $ 330

Our Forever Home we bought for $ 200 K in the early 1990s, and sold it 10 Years later for $ 375 K, today it sells for somewhere in the $ 475 to $ 500 K range.

So there you have it…

Houses that have BOTH increased in value substantially (more than $ 10 K per year)… whereas if you continue to rent, you’ll be spending more than $ 10 K annually that you’ll see virtually NO RETURN on whatsoever.

The one thing I would say is that both our homes were in good locations… as they say in Real Estate… LOCATION IS EVERYTHING !!

Buying or not buying is up to you… but I would certainly take some time to do some more research and speak with a longtime Real Estate Agent in the area you are considering to get their point of view before you rule out the idea entirely.

Hope this helps,

PS… You have to remember that some of the elements you are weighing… Maintenance, Real Estate Costs etc… are just part of the price of being in the Housing Market. Altho there is a cost to them, they exist whether you have a Starter Home, Forever House, or a McMansion… they just are a fact once you are Home Owner vs a Renter. They come with the territory… and will exist as long as you are in the Housing Market vs some other choice in housing.

@soy: It’s not. We got an amazing deal on it because the lady we were renting it from is one of those house-flippers so she sold it to us at a very low price. She bought it for next to nothing at an auction. I think the only reason she sold it to us for so cheap is because she had just bought it a couple months before we moved in and selling it to us meant she didn’t have to go to the trouble of trying to sell it. We also agreed to buy it “as is” which meant that we had do some work on the house ourselves. We had to buy a new air conditioner and water heater in the first year. But again, it was such a good deal it was worth it.

We also have really good credit thanks to my super responsible DH 😉

In our situation, buying this house made absolute sense. Even though it only has one bathroom, so I can’t imagine living in it once our kids are teens. If it hadn’t been under those circumstances we probably would have kept looking until we found one that closer met our idea of a forever home.

@soy: My dad is primarily a golf course constructor who works with architects such a Arnold Palmer & Pete Dye, but on the side he bought houses, fixed them up, & then sold them.

One of the important things to consider if you are just trying to make the most out of the house is the only fix up things that will add to the value. LOTS of things that people want to add or renovate to their own personal houses does not actually increase the profitability, so your best bet would be to be 100% sure whether you want this to be your forever home or a starter home. If you start mixing your ideas on this you will waste a LOT of money.